Management Quality and Risk Preference as Determinants of Efficiency in the Italian Banking System

Abstract

Italian banks are characterized by deep efficiency inequality across size, location, Cooperative Credit Banks, and Limited Companies. Moreover, non-performing loans are higher in the South than elsewhere. In view of these evidences we asked: is the efficiency gap of the southern banks (and therefore their lower screening and monitoring ability) the primary source of their higher level of bad loans? Or is the poorer quality of the southern bank loans (due to the adverse macroeconomic environment) that causes lower efficiency? As a second point to investigate, we recognize that banks have different risk aversion, which affects the choice of input vector, and we expressly take into account the capitalization degree (as a buffer against the risk) in estimating the bank cost and profit stochastic frontier. The results of the analysis, based on the stochastic frontier models, provide evidence in favour of the endogeneity theory of non-performing loans.

Keywords: Bank Efficiency, Stochastic Frontiers, Italian Banks

JEL Classification: G21